America Movil Drops as Fee-Cut Proposal Threatens Profits

Mexico has been trying to improve telecommunications competition for 20 years. Slim, the world’s second-richest person, took control of the industry through the 1990 privatization of the state phone monopoly. Photographer: Susana Gonzalez/Bloomberg

March 25 (Bloomberg) -- America Movil SAB, the phone giant
controlled by billionaire Carlos Slim, tumbled on concerns that
profits would suffer in its home market under a proposal sent to
Mexico’s Congress by President Enrique Pena Nieto.

If the bill passes, America Movil won’t be able to assess
fees to competitors for incoming calls or charge customers extra
for long distance. The Mexico City-based company has about 70
percent of mobile-phone subscribers and 80 percent of landlines
in Mexico.

America Movil, the heaviest-weighted stock on Mexico’s
benchmark IPC index, led declines as the shares fell 4 percent
to 13.09 pesos at the close in Mexico City, for the biggest drop
since Aug. 9.

“We assume a contraction in profitability as a consequence
of asymmetric regulation,” Manuel Jimenez, an analyst at Grupo
Financiero Banorte SAB, said in a note today. “We’ve
incorporated an erosion in Mexican revenue due to losses from
long-distance calls over three years, as well as stronger
competition between operators.”

Shares Downgraded

Bank of America Corp. downgraded America Movil shares to
neutral from buy, saying the law will hurt earnings. The
company’s profit in Mexico will decline by 15 percent over three
years, Sanford C. Bernstein & Co. has estimated, as the industry
opens up for foreign investment and more active competition.

Violating the new law would be punishable by fines of as
much as 5 percent of sales, or double for repeat offenses.
America Movil had sales last year in Mexico of about $22
billion.

The bill, which also affects television broadcasters such
as Grupo Televisa SAB, is expected to pass in the current
legislative session, Communications and Transportation Minister
Gerardo Ruiz said yesterday.

The law requires a simple majority to pass, giving Pena
Nieto enough votes through his political coalition for approval
in the lower house, where his Institutional Revolutionary Party,
or PRI, combined with the Green Party and New Alliance party,
have a one-vote majority. In the Senate, the parties are three
votes short.

‘Unacceptable’ Differences

The PRI will probably try to win more votes from the
National Action Party, or PAN, and Democratic Revolution Party,
or PRD, the two main opposition parties, said Duncan Wood,
director of the Mexico Institute at the Woodrow Wilson
International Center for Scholars in Washington.

The PAN and PRD said yesterday the bill has "unacceptable"
differences from last year’s constitutional amendment and must
be changed. Pena Nieto’s proposal would reduce the power of the
Federal Telecommunications Institute, or IFT, the regulator
created last year, according to the parties.

“This is not going to be passed as is, there are going to
be some concessions made,” Wood said in a phone interview.
“The government really wants to gain a consensus and achieve a
consensus position. They still want to build a coalition, they
do not want to impose the will of the governing party.”

The IFT has already declared America Movil and Televisa
dominant in their industries because of their proportion of
users. The new law would give the agency legal backing as it
prepares measures to cut down on the companies’ market power.

“With this law we will have more competition,” Deputy
Communications Minister Jose Ignacio Peralta told reporters
yesterday in Mexico City. “The concentration we find in this
market will be more balanced among competitors. It will give
clarity to our laws, and it will incentivize new entrants.”

Televisa Gains

Shares of Televisa, which had $5.8 billion in revenue last
year, mostly in Mexico, rose 1.1 percent to 83.03 pesos. The
company, owned by another billionaire, Emilio Azcarraga, gets
about 70 percent of broadcast viewers.

“In our country the telecommunications sector has been
characterized by high prices, generating low penetration of
services and a deficient development of infrastructure necessary
to provide them,” Pena Nieto said in a preface to the bill sent
to Congress yesterday.

As long as America Movil has more than 50 percent of
subscribers, it won’t be able to charge fees to competitors for
incoming calls, Pena Nieto’s bill says. Its rivals, such as
Telefonica SA and Grupo Iusacell SA, will still be able to bill
America Movil when its users call their customers. Eventually,
when the telecommunications institute determines that
competition has improved, it will phase out the interconnection
fees altogether.

Profit Margin

The changes will cut America Movil’s profit margin to 36
percent in 2020 from 44 percent last year, leaving out interest,
tax, depreciation and amortization, Bank of America said today
in a research note. Wireless market share will fall to 63
percent by 2020, it said.

Television broadcasters, meanwhile, will have to publish
their advertising rates and stand by them regardless of who the
customer is.

The IFT can fine companies as much as 5 percent of Mexican
sales if they offer services without authorization or shut down
services in locations where they’re the only provider. Smaller
fines can be assessed for violating interconnection requirements
or blocking advertisers.

Steeper Fines

Previously, regulators could only fine as much as $500,000
for rules violations, or $1 million for repeat offenses.
Antitrust fines were as high as 10 percent of sales.

TV broadcasters are limited to using 18 percent of their
airtime for advertising, though they may increase that number if
they use local production for programming. Each network must
have an ombudsman to handle viewer complaints, and political
propaganda can’t be presented as news, the bill says.

While the proposal generally follows international best
practices, the fines it plans are disproportionate and its
requirements for infrastructure-sharing go too far, Televisa
said in an e-mailed statement today. The bill doesn’t go far
enough in regulating America Movil’s prices, the company also
said.

Last year’s constitutional amendment created the IFT and
gave it powers to assess fines, set prices and even force asset
sales if companies don’t comply with the law. The amendment also
made it harder to battle regulatory decisions in court, saying
the IFT’s decisions can’t be suspended while they’re being
challenged.

Mexico has been trying to improve telecommunications
competition for 20 years. Slim, the world’s second-richest
person, took control of the industry through the 1990
privatization of the state phone monopoly.

Legal Monopoly

The government let Slim operate a legal monopoly after the
transaction before gradually introducing competition over the
following decade. Rivals weren’t able to match the reach of his
network infrastructure with their investments, and regulators
were then much weaker, assuring Slim’s dominance was never
seriously threatened.

Televisa is run by Azcarraga, its founder’s grandson, and
the company has loomed over Mexico’s media landscape for half a
century. Azcarraga’s father, also named Emilio, was known as
“The Tiger” for his combative style and built Televisa into a
powerhouse by aligning his interests with the government during
its period of one-party rule, famously declaring himself a
“soldier of the president.” The company faced little
competition until 1993, when the government auctioned off a
state-run channel to create TV Azteca SAB.